- Stock markets in Asia and Europe rode out the latest rise in tensions around North Korea and are showing small gains. The dollar firmed today and US equities opened little changed as attention turns to the minutes from the US June Fed meeting.
- The revision of the Eurozone services PMI for June surprised on the upside. The flash reading of 54.7 was revised up to 55.4. This brings the final PMI closer to the May figure of 56.3. The composite PMI went from 56.8 in May to 56.3 in June (flash at 55.7). For Q2, the average composite PMI was 56.6. This is the best outcome since Q1 2011.
- The UK services PMI slipped to 53.4 in June from May’s 53.8. That was broadly as expected but takes the index to its lowest since February. Business expectations saw a sharper fall, pointing to growing pessimism about the outlook as higher inflation is biting and Brexit uncertainties loom.
- The Eurozone retail sales for May came in bang on consensus at 0.4% M/M. In Y/Y-terms, retails sales rose 2.6% above the 2.3% consensus and the 2.5% April reading. Automotive fuel (+1.7% M/M) saw the biggest volume increases.
- A Saudi-led bloc of nations isolating Qatar are meeting to discuss how to go forward as their deadline for Qatari compliance with a list of tough demands expires. Additional punitive measures may emerge from the meeting.
- Markets are awaiting the publication of the US minutes later today which could give clues on when the Fed balance-sheet runoff could start and what the sequencing would be. Another topic is the level of concern among officials over financial stability after several, including Yellen, spoke out about high asset prices
Rates
Calm temporarily interrupted by stronger EMU PMI’s
Boring sideway trading with a shy fourth attempt of the Bund to attack key support. It was a waiting game on the FOMC Minutes later today and labour market data tomorrow and Friday. German bonds started little changed but went for another test of key support at 161.68/58 when EMU June countries’ services PMI’s were unexpectedly revised substantially higher, halving the earlier reported decline (see headlines). However, the support proved too strong, given the information value of the revised figures and ahead of the more important US data on Thursday and Friday. The Bund rebounded in two steps to opening levels at noon. After this, the Bund hovered listless near these levels, before falling slightly lower once more. The German 5-yr OBL auction, as usual, drew little interest (see below), and didn’t affect trading either. US Treasuries showed even less volatility and traded close to opening levels.
At the time of writing, the German yield curve had shifted marginally higher by about 1 bp. A benchmark change in the 5-yr distorted the picture. The US curve showed even less variation notably between flat and -0.4 bp. Similar lacklustre trading happened in the intra-EMU markets with 10-yr yield spreads remaining virtually unchanged.
Germany sold €3.22B of its new 0% October 2022 at an average yield of -0.14%. The Bundesbank retained €780M for its market regulation. Total bids amounted to €4.518B, which resulted in a real bid/cover of a meagre 1.1. The auction tailed 1 eurocent. That was close to the average of past auctions though. The Bundesbank retention of 19.5% was also near recent retained percentages.
Currencies
Dollar drifting cautiously higher
The dollar followed the trading pattern of previous days. The US currency enjoyed a cautious bid as investors awaited the Minutes of the June Fed meeting (this evening) and the key US data later this week. Strong EMU data again failed to support the euro. EUR/USD drifted further south and trades in the 1.1320 area. USD/JPY is trending higher in the 113 big figure.
Overnight, Asian equities took again a hesitant start due to lingering geopolitical tensions on North Korea, but market sentiment improved throughout the session. USD/JPY dropped temporary to the 112.83 area, but traded again north of 113 going into the start of the European session. In technical trade, EUR/USD traded marginally stronger at 1.1350/60.
European equities didn’t find a clear direction and finally settled in a sideways range close to, mostly marginally above yesterday’s close. The EMU services PMI’s showed a remarkably big upward surprise (see headlines). European yields tried a shy attempted to go higher, but the move faded fast and didn’t help the euro. On the contrary, the dollar soon resumed the gradual uptrend. ECB’s Coeuré commented a report on the international use of the euro in 2016. He indicated that the role of the euro as reserve currency could strengthen. At the same time, he downplayed recent moves/volatility of the euro. He also said the ECB had not discussed changes in monetary policy. The comments maybe slightly accelerated the decline of the euro. Even so, dollar strength still prevailed. EUR/USD drifted to the 1.1315 area. USD/JPY filled offers in the 113.65/70 area.
There were no early morning US data and the factory orders, which are published at 16.00 CET, are no market mover. US trading took a slow start after the 4th of July holiday. The dollar rebound slowed as investors await the FED Minutes this evening and, even more the US data tomorrow and on Friday. The dollar maintained its recent gains, but the rally slowed. EUR/USD trades in the 1.1325 area. USD/JPY hovers just north of 113.50. Will hints in the Minutes from the Fed on the balance sheet reduction allow the dollar to extend its rebound?
Few UK drivers for sterling trading
The UK services PMI eased slightly more than expected from 53.8 to 53.4 (53.5), but the deviation from consensus was too small to really affect sterling trading. As was the case earlier this week, EUR/GBP and cable trading was technical in nature or driven by the broader trends in the euro or the dollar. The gradual USD rebound pushed cable to the low 1.29 area. (currently 1.5 area). BoE Saunders warned households should prepare for interest rates to go higher. However, his assessment also brought little news for markets as he already voted for a rate hike last month.
